The first quarter gross domestic product (GDP) numbers show the trend of lower consumption growth continues unabated. It’s proof, at the macro level, of the success of the efforts of the Reserve Bank of India (RBI), which adopted belt-tightening measures. Consider the steady deceleration in the year-on-year rates of growth of private final consumption expenditure (PFCE) over the last five quarters. Taking the numbers at constant prices, growth was 6.5% in the first quarter of FY2007, tapered off to 6.3% in the second quarter, stayed at 6% in the third and fourth quarters, and went down further to 5.6% in the first quarter of FY2008.
That ties in well with RBI’s data on retail lending. RBI’s annual report reveals growth in personal lending, which includes housing loans, credit cards, advances against fixed deposits, education loans, and loans for consumer durables, slowed down from 40.5% in FY2006 to 26.5% in FY2007. Even after making allowances for the fact that the data for FY2007 is for 26 fortnights, while that for FY2006 is for 27 fortnights, the slowdown is pretty clear.
External demand, another important source of demand, is also faltering, because of the appreciation in the value of the rupee. During the first quarter of the current fiscal, exports increased by 5.5%, which is less than half the rate of growth in the first quarter of FY2007. The rate of growth of imports, on the other hand, increased from 11.7% in Q1, FY2007 to 16.1% in the June quarter of the current year. Gross fixed capital formation, on the other hand, continues to be robust, growing at 15.9%, compared with 15.8% in the first quarter of FY2007. Much will depend on how fast the government’s plans for infrastructure spending in the 11th five-year plan bear fruit.
The markets have, in any case, anticipated the trend, pushing up the value of capital goods and wholesale banking stocks, while remaining lukewarm towards the consumer sectors and punishing exporters.
Investments in India’s high-growth telecom story have been among the most profitable in the bull run, which started in early 2003. Bharti Airtel Ltd’s market capitalization has risen at a compounded average growth rate of 120% since 2003. In comparison, the S&P CNX Nifty has risen at an average rate of 42.5%. What’s more, Bharti’s returns have been higher than that of the broad market index, in each of the last five years.
The Telecom Regulatory Authority of India (Trai) made recommendations on spectrum allocation, which, if accepted by the Union government, may just cause the law of averages to catch up with Bharti shares. The recommendations are pro-competition and favour new entrants, which is a negative for incumbents such as Bharti. Citigroup Inc. has said in a recent report that it has factored in a 3-4 percentage point decline in Bharti’s market share in FY2009. For the company’s subscriber addition and revenue numbers to be the same as earlier expectations of analysts, industry growth would have to be higher-than-earlier expectations. Besides, since it will be a while before spectrum will be available for incumbents, they may have to invest in infrastructure to reduce congestion in peak circles. Capital expenditure estimates, too, would change.
Then, there’s the 1% increase in spectrum fee. But analysts aren’t worried, because access deficit charge has progressively been coming down and signalling for the lowering of the contribution to the USO (universal services obligation) fund. Besides, companies have also hiked tariffs recently.
Shares of Reliance Communications Ltd have outperformed those of Bharti since Trai’s recommendations were released, on the belief that its plans to introduce GSM services will get a boost. It remains to be seen how many circles Reliance will enter with GSM technology because it would have to pay an entry fee. Citigroup estimates that with the Rs1,500 crore it would have to pay for entry into 15 circles, Reliance could potentially fund 40 million CDMA subscribers. On the other hand, if it foregoes the GSM option, that would affect the valuations of its tower company valuations.
The easier availability of spectrum also would benefit Idea Cellular Ltd and Aircel Cellular, who are awaiting spectrum to launch services in new circles. It’s no surprise that Idea’s shares have risen the most—5.3%—since the recommendations were announced. Spice Communications Ltd’s stocks also rose about 4%. It would now become easier for larger companies to acquire it, since there are no caps on the combined spectrum of merged entities.
The bottomline is the recommendations are pro-consumer and pro-competition, and most analysts agree they are negative for the sector.
Write to us at email@example.com